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Big investors aim to double ESG flows; UK pay accuracy in focus; Biden’s green(ish) pick

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Breaking news: The UK on Friday threw down the gauntlet to other countries ahead of a climate summit next week by becoming one of the first leading economies to upgrade its carbon emissions reduction target for 2030, our FT colleagues have reported. Prime minister Boris Johnson set a target for the UK to slash its emissions by 68 per cent by the end of the decade, relative to 1990 levels, in a move that will require restructuring a significant portion of the economy.

The announcement comes on the heels of former Bank of England governor Mark Carney’s statements on Wednesday in support of a global carbon offset market, calling it an “imperative” to help reduce emissions.

Welcome to Moral Money. Today we have:

  • An “awakening in the investment management community”

  • Possible manipulation of companies’ pay ratio figures

  • BlackRock’s Brian Deese picked for top White House role

BlackRock survey points to huge growth for ESG

We know there are still plenty of ESG sceptics out there. But the number of non-believers is shrinking by the day, and it is starting to look like anyone betting against sustainability is taking the opposite side of a huge momentum trade.

BlackRock, the world’s largest asset manager, recently asked 425 of its institutional clients about their plans for the future and found that they intended to double their exposure to environmental, social and governance (ESG) investing over the next five years. Yes, really.

This is important for numerous reasons. First and foremost is the sheer amount of money involved. The survey respondents themselves come from all over the globe and oversee a collective $25tn in assets. While it is notoriously hard to pin down an exact figure on the total size of the ESG market, it is clear that the growth potential is huge.

This response is also a sign that the idea that ESG harms performance is dying out. The survey shows an “awakening in the investment management community” that ESG delivers enhanced returns, said Mark McCombe, chief client officer at BlackRock.

Another striking detail: an overwhelming number of respondents said climate change was their top priority. This is important, given that the survey was completed in September 2020, which meant that even the economic stress of the pandemic was not damping investors’ interest in addressing climate change.

It is unclear whether this is the cause of BlackRock’s own new-found emphasis on climate risk or a reaction to it, but it is an encouraging sign that investors are coming around to the problem.

As famed investor Jeremy Grantham pointed out at the FT Moral Money Investing for Good Summit yesterday, climate risk is still wildly mispriced, and the sooner that investors reposition for that, the better. The scale of money that needs to move is startling: a new paper from the Global Financial Markets Association suggests that investors need to pump an additional $3tn-$5tn per year into decarbonising the economy to achieve the Paris climate goals.

Can this happen? Moral Money readers will not be shocked to learn that the BlackRock survey also found that the lack of clarity around ESG definitions, data and ratings was the top complaint for investors.

Another problem is the lack of sustainable investing products, which was cited by 31 per cent of the survey respondents. That might seem more surprising considering the boatload of PR emails we receive every day announcing new sustainable fund launches. But it probably reflects a sense of frustration with the fact that if you ask 100 different people what sustainable investing means, you are likely to get 100 different answers.

© UBS

However, one development that may soon address this is customisation, as Suni Harford, (pictured above) the president of UBS Asset Management, told the FT’s Investing for Good summit this week. While separately managed accounts — where investors can have granular control over the securities in their portfolio — have traditionally been available only to the largest investors, new technology is making it much easier and cheaper to roll these products out downmarket.

Technology also makes it much easier to implement automated ESG strategies within these accounts, which can be tailored to an individual investor’s preferences. BlackRock’s recent acquisition of Aperio and Morgan Stanley’s purchase of Eaton Vance (and its subsidiaries Parametric and Calvert) suggest they agree that customisation is important — and are jumping in too.

As momentum builds, it will be harder for naysayers to stand aloof. Or as Ms Harford said in her keynote, when investors tell her they don’t believe in climate change, her answer is: “I don’t care.” The direction of travel is clear. (Billy Nauman)

Accuracy of pay ratios receives increasing attention

© Ed Sweetman/Dreamstime

For decades, the UK has required companies to compare executives’ earnings with the pay of ordinary employees — a ratio designed to help scrutinise increasing inequality. But the real pay gap is actually much bigger than reported because companies do not have to include outsourced low-paid work, according to a new paper from the London School of Economics and Political Science.

In fact, companies with high pay ratios outsourcing non-core has become standard operational practice, the paper found.

For the 94 companies in the FTSE 100 that are not investment firms, average pay in 2015 was £52,233 — more than twice the UK average earnings for the year, the paper said.

Companies are starting to publish their annual ratios, “but the emerging data show that the current regulations are deeply flawed”, said the paper’s authors, professors Paul Willman and Alex Pepper.

The disclosure requirements “should really include all workers, including agency and other casual workers, as well as non-UK employees. Only then might these new disclosure requirements begin to have an effect,” they added.

Meanwhile, UK company pay ratios are probably not skewed as badly as their US counterparts — with huge supply chains originating from Asia, the professors said. The accuracy of pay ratios has recently received increasing attention, at least in liberal-leaning parts of the country. San Francisco voters last month approved a “CEO tax” on businesses that have a 100-to-1 pay ratio. Will New York be next? (Patrick Temple-West)

Biden’s BlackRock White House pick gets mixed response

© REUTERS

After seemingly endless speculation, the incoming Joe Biden administration has finally made it official: Brian Deese (pictured, left) will be the new head of the National Economic Council.

Given his prior role as BlackRock’s head of sustainable investing, Mr Deese’s appointment has been applauded by many in the ESG world. The BlueGreen Alliance, a consortium of some of the US’s largest labour unions and environmental organisations, said there was “no better choice” for the job. And Republican Hank Paulson, the former Treasury secretary and head of Goldman Sachs, sang his praises, saying: “His energy and skills will be invaluable in dealing with the enormous economic challenges posed by the Covid crisis and climate change.”

Many in the climate activist community are not happy. Last week, when it was reported that Mr Deese was being considered for the role, progressive organisations including the Rainforest Action Network, Greenpeace USA and the Sunrise Movement staged an impromptu protest outside BlackRock’s headquarters. They say Mr Deese’s tenure at BlackRock should disqualify him from joining the Biden administration, because they believe the firm has not done enough to back up its rhetoric on climate change.

However, Mr Deese did win a vote of support from Bill McKibben, co-founder of 350.org. Mr McKibben has a long personal history with Mr Deese as he outlined in a thread on Twitter. Some of the criticism he has seen from climate activists has not been “remotely correct”, Mr McKibben wrote. “I know he cares a lot, and works hard on the issue.” (Billy Nauman)

Billionaires’ bet

In recent years Iconiq, the secretive family office that manages the gazillion-dollar wealth of many of the most successful Silicon Valley stars (think Mark Zuckerberg, Sheryl Sandberg, Jack Dorsey, Reid Hoffman, to name but a few) has tried to stay under the radar.

But this week it briefly poked its nose above the parapet to announce that it has chosen finalists for a $12m competition that its clients are funding to create innovative refugee support programmes. The key backer for this is Chris Larsen, founder of Ripple, and his wife Lyna Lam, herself a former refugee following the Vietnam war and Cambodian genocide.

Of course $12m is not even chump change for Iconiq (or Larsen) — and this is just one of numerous philanthropic ventures tumbling out of Silicon Valley right now. However, there are two reasons why this move is an interesting sign of the times. One is that it shows the degree to which family offices of all stripes face demands from their clients to demonstrate commitment to humanitarian causes.

Second, the refugee competition is just the tip of the iceberg of some intense, furtive brainstorming under way inside Iconiq’s network around how to leverage its powerful stable of entrepreneurs — and “entrepreneurial capital” — to scale up philanthropy and affect investment in some innovative ways.

The fruits of this have yet to be seen. But, if nothing else, it should remind us all that the ESG wave is not just sparking a shift in behaviour in the public markets — or the highly visible ETF space — but the deeply secretive private family offices too. (Gillian Tett)

Chart of the day

Proxy votes on 2020 key climate resolutions, matched 2019 resolutions

Morningstar this week published a report on the support for climate change shareholder proposals during 2020. BlackRock and Vanguard supported 12 and 15 per cent of climate change resolutions respectively, Morningstar said. But there was a significant range in funds’ willingness to back climate change proposals. Smaller fund firms with a history of supporting climate initiatives were more likely to increase their willingness to vote in favour of these resolutions this year.

Grit in the oyster

Just a few short months after announcing its “Cocoa for Good” sustainability programme, US chocolate maker Hershey’s has come under fire (along with other confectionery companies) for allegedly dodging a levy to help impoverished small farmers in Ghana and Ivory Coast.

Hershey’s, which is reported to have bought a large quantity of cocoa from an exchange that allowed it to avoid a $400 per tonne living wage surcharge, was also banned from operating chocolate sustainability programmes in the two countries, our FT colleagues wrote this week.

Hershey’s said the “misleading” statement from the two countries was “unfortunate” and they had jeopardised critical programmes that helped farmers. The confectioner said it was participating in the levy for the current crop year and would continue to do so.

Seeking your input

As trailed this week, the Moral Money Forum is launching a series of in-depth reports, and we’re keen to inform them with your insights. Our first report will ask how investors and the companies they invest in can encourage long-term behaviour in a world of short-term pressures. Please share your thoughts, case studies and data with us here.

In honour of the fifth anniversary of the Paris climate agreement, a team of filmmakers created a documentary titled The Decade of Action that looks at how companies are reinventing themselves to make their business, and our world, sustainable. On December 10 at 11am CET the film will premiere followed by a panel discussion moderated by Gillian Tett. Register for the live event and film release here.

Further reading

  • Biden’s climate agenda goes global (FT)

  • For female economists, Janet Yellen’s Treasury secretary nomination marks another inspiring first (WashPost)

  • BlackRock’s Aladdin to Provide Security-Level Climate Risk Tool (FundFire)

  • The Future of ESG Is . . . Accounting? (HBR)





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Wall Street stocks follow European and Asian bourses lower

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Equities updates

Wall Street stocks followed European and Asian bourses lower on Friday after markets were buffeted this week by jitters over slowing global growth and Beijing’s regulatory crackdown on tech businesses.

The S&P 500 closed down 0.5 per cent, although the blue-chip index still notched its sixth consecutive month of gains, boosted by strong corporate earnings and record-low interest rates.

The tech-focused Nasdaq Composite slid 0.7 per cent, after the quarterly results of online bellwether Amazon missed analysts’ forecasts. The tech conglomerate’s stock finished the day 7.6 per cent lower, its biggest one-day drop since May 2020.

According to Scott Ruesterholz, portfolio manager at Insight Investment, companies which saw significant growth during the pandemic may see shifts in revenue as consumers move away from online to in-person services.

“[Consumers are] going to start spending more on services, and so those businesses and industries which have benefited in the last year, companies like Amazon, will be talking about decelerating sales growth for several quarters,” Ruesterholz said.

The sell-off on Wall Street comes after the continent-wide Stoxx Europe 600 index ended the session 0.5 per cent lower, having hit a high a day earlier, lifted by a bumper crop of upbeat earnings results.

For the second quarter, companies on the Stoxx 600 have reported earnings per share growth of 159 per cent year on year, according to Citigroup. Those on the S&P 500 have increased profits by 97 per cent.

But “this is likely the top”, said Arun Sai, senior multi-asset strategist at Pictet, referring to the pace of earnings increases after economic activity rebounded from the pandemic-triggered contractions last year. Financial markets, he said, “have formed a narrative of peak economic growth and peak momentum”.

Column chart of S&P 500 index, monthly % change showing Wall Street stocks rise for six consecutive months

Data released on Thursday showed the US economy grew at a weaker than expected annualised rate of 6.5 per cent in the three months to June, as labour shortages and supply chain disruptions caused by coronavirus persisted.

Meanwhile, China’s regulatory assault on large tech businesses has sparked fears of a broader crackdown on privately owned companies.

“It underlines the leadership’s ambivalence towards markets,” said Julian Evans-Pritchard of Capital Economics. “We think this will take a toll on economic growth over the medium term.”

Hong Kong’s Hang Seng index closed 1.4 per cent down on Friday, while mainland China’s CSI 300 dropped 0.8 per cent, after precipitous slides earlier in the week moderated.

Japan’s Topix closed 1.4 per cent lower, after the daily tally of Covid cases in Tokyo surpassed 3,000 for three consecutive days. South Korea’s Kospi 200 dropped 1.2 per cent.

The more cautious investor mood on Friday spurred a modest rally in safe haven assets such as US government debt, which took the yield on the 10-year Treasury, which moves inversely to its price, down 0.04 percentage points to 1.23 per cent.

The Federal Reserve, which has bought about $120bn of bonds each month throughout the pandemic to pin down borrowing costs for households and businesses, said this week that the economy was making “progress” but it remained too early to tighten monetary policy.

“Tapering [of the bond purchases] could be delayed, which in many ways is not bad news for the market,” said Anthony Collard, head of investments for the UK and Ireland at JPMorgan Private Bank.

The dollar, also considered a haven in times of stress, climbed 0.3 per cent against a basket of leading currencies.

Brent crude, the global oil benchmark, rose 0.4 per cent to $76.33 a barrel.

Unhedged — Markets, finance and strong opinion

Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here to get the newsletter sent straight to your inbox every weekday



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US regulators launch crackdown on Chinese listings

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US financial regulation updates

China-based companies will have to disclose more about their structure and contacts with the Chinese government before listing in the US, the Securities and Exchange Commission said on Friday.

Gary Gensler, the chair of the US corporate and markets regulator, has asked staff to ensure greater transparency from Chinese companies following the controversy surrounding the public offering by the Chinese ride-hailing group Didi Chuxing.

“I have asked staff to seek certain disclosures from offshore issuers associated with China-based operating companies before their registration statements will be declared effective,” Gensler said in a statement.

He added: “I believe these changes will enhance the overall quality of disclosure in registration statements of offshore issuers that have affiliations with China-based operating companies.”

The SEC’s new rules were triggered by Beijing’s announcement earlier this month that it would tighten restrictions on overseas listings, including stricter rules on what happens to the data held by those companies.

The Chinese internet regulator specifically accused Didi, which had raised $4bn with a New York flotation just days earlier, of violating personal data laws, and ordered for its app to be removed from the Chinese app store.

Beijing’s crackdown spooked US investors, sending the company’s shares tumbling almost 50 per cent in recent weeks. They have rallied slightly in the past week, however, jumping 15 per cent in the past two days based on reports that the company is considering going private again just weeks after listing.

The controversy has prompted questions over whether Didi had told investors enough either about the regulatory risks it faced in China, and specifically about its frequent contacts with Chinese regulators in the run-up to the New York offering.

Several US law firms have now filed class action lawsuits against the company on behalf of shareholders, while two members of the Senate banking committee have called for the SEC to investigate the company.

The SEC has not said whether it is undertaking an investigation or intends to do so. However, its new rules unveiled on Friday would require companies to be clearer about the way in which their offerings are structured. Many China-based companies, including Didi, avoid Chinese restrictions on foreign listings by selling their shares via an offshore shell company.

Gensler said on Friday such companies should clearly distinguish what the shell company does from what the China-based operating company does, as well as the exact financial relationship between the two.

“I worry that average investors may not realise that they hold stock in a shell company rather than a China-based operating company,” he said.

He added that companies should say whether they had received or were denied permission from Chinese authorities to list in the US, including whether any initial approval had then be rescinded.

And they will also have to spell out that they could be delisted if they do not allow the US Public Companies Accounting Oversight Board to inspect their accountants three years after listing.



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Wall Street stocks climb as traders look past weak growth data

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Equities updates

Stocks on Wall Street rose on Thursday despite weaker than expected US growth data that cemented expectations that the Federal Reserve would maintain its pandemic-era stimulus that has supported financial markets for a year and a half.

The moves followed data showing US gross domestic product grew at an annualised rate of 6.5 per cent in the second quarter, missing the 8.5 per cent rise expected by economists polled by Reuters.

The S&P 500, the blue-chip US share index, closed 0.4 per cent higher after hitting a high on Monday. The tech-heavy Nasdaq Composite index climbed 0.1 per cent, rebounding slightly after notching its worst day in two and a half months earlier in the week.

The dollar index, which measures the US currency against those of peers, fell 0.4 per cent to its weakest level since late June after the GDP numbers.

“Sentiment about the economy has become less optimistic, but that is good for equities, strangely enough,” said Nadège Dufossé, head of cross-asset strategy at fund manager Candriam. “It makes central banks less likely to withdraw support.”

Jay Powell, the Fed chair, said on Wednesday that despite “progress” towards the bank’s goals of full employment and 2 per cent average inflation, there was more “ground to cover” ahead of any tapering of its vast bond-buying programme.

“Last night’s [announcement] was pretty unambiguously hawkish,” said Blake Gwinn, rates strategist at RBC, adding that Powell’s upbeat tone on labour market figures signalled that the Fed could begin tapering its $120bn a month of debt purchases as early as the end of this year.

The yield on the 10-year US Treasury bond, which moves inversely to its price, traded flat at 1.26 per cent.

Line chart of Stoxx Europe 600 index showing European stocks close at another record high

Looking beyond the headline GDP number, some analysts said the health of the US economy was stronger than it first appeared.

Growth numbers below the surface showed that consumer spending had surged, “while the negatives in the report were from inventory drawdown, presumably from supply shortages”, said Matt Peron, director of research and portfolio manager at Janus Henderson Investors.

“This implies that the economy, and hence earnings which have also been very strong so far for Q2, will continue for some time,” he added. “The economy is back above pre-pandemic levels, and earnings are sure to follow, which should continue to support equity prices.”

Those upbeat earnings helped propel European stocks to another high on Thursday, with results from Switzerland-based chipmaker STMicroelectronics and the French manufacturer Société Bic helping lift bourses.

The region-wide Stoxx Europe 600 benchmark closed up 0.5 per cent to a new record, while London’s FTSE 100 gained 0.9 per cent and Frankfurt’s Xetra Dax ended the session 0.5 per cent higher.

In Asia, market sentiment was also boosted by a move from Chinese officials to soothe nerves over regulatory clampdowns on the nation’s tech and education sectors.

Beijing officials held a call with global investors, Wall Street banks and Chinese financial groups on Wednesday night in an attempt to calm nerves, as fears spread of a more far-reaching clampdown. Hong Kong’s Hang Seng rose 3.3 per cent on Thursday, although it was still down more than 8 per cent so far this month. The CSI 300 index of mainland Chinese stocks rose 1.9 per cent.

Brent crude, the global oil benchmark, gained 1.4 per cent to $76.09 a barrel.



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